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This edition of Tax Advisor Weekly discusses some practical aspects related to the introduction of country-by-country (CbC) reporting by the Internal Revenue Service and the audit risks large and mid-sized companies may face following the submission of their CbC reports.

The IRS published further instructions for voluntary CbC report filings on March 1. Revenue Procedure 2017-23 provides guidance for United States headquartered multinational groups wishing to voluntarily file CbC reports for the 2016 “gap period” not covered under existing U.S. regulations, but widely required in other jurisdictions. This Revenue Procedure follows the adoption of Treasury Regulation 1.6038-4 on June 30, 2016, which implemented CbC reporting rules in the U.S. for tax years beginning on or after June 30, 2016. As numerous countries adopted CbC reporting requirements for periods starting on or after January 1, 2016, there was concern about how U.S. multinational groups would be able to meet the international reporting guidelines during the resulting six-month gap period. This Revenue Procedure outlines how multinationals can meet their international obligations, while still submitting the report to the IRS (as opposed to a foreign tax authority).

The IRS requires CbC reporting by the ultimate parents of U.S. multinational groups with revenues of US$850 million or more in the preceding tax year through completing Form 8975. The filer must list the U.S. MNE group’s business entities, with their appropriate tax jurisdiction (if any), country of organization and main business activity, along with financial and employee information for each tax jurisdiction in which the U.S. MNE does business. Financial information required includes revenues, profits, income taxes accrued, income taxes paid, stated capital, accumulated earnings and tangible assets other than cash.

The ultimate parent of the MNE group is required to report in the 12-month reporting period that begins on or after the first day of the tax year of the ultimate parent starting June 30, 2016. Although the revenue procedure clarifies that Form 8975 can be filed commencing September 1, 2017, the IRS recognizes that if local CbC reporting from foreign subsidiaries of U.S. MNE groups is required by other jurisdictions that begin on or after January 1, 2016, a Form 8975 can be filed for earlier periods.

Filing Practicalities

The IRS is negotiating with individual countries to reach an agreement that constituent entities of U.S. MNEs will not have to file CbC reports in such foreign jurisdictions if the parent voluntarily files a Form 8975 with the IRS. The CbC report will be exchanged with the foreign jurisdiction subject to a competent authority agreement. Thus, these bilateral agreements would allow U.S. MNEs to file their 2016 global tax and profit reports with the IRS instead of with foreign jurisdictions. Companies eagerly await announcement of such agreements, as without them they would face the possibility of duplicate filings.

As of May 10, 2017, the IRS had signed three competent authority agreements to exchange companies’ global tax and profit reports with foreign jurisdictions. Of the three agreements, only an arrangement with the Netherlands has been publicly announced. The IRS has not released the names of the other two countries. The IRS anticipates signing several more agreements in the near future and posting the list of jurisdictions onto the IRS website for the public to easily access.

The IRS has released two model agreements laying the groundwork for exchanging companies’ global tax and profit reports with foreign tax authorities, allowing the companies to file them with the U.S. rather than with foreign tax authorities. One model relies on treaties, and the other relies on tax information exchange agreements as the legal basis for exchange.

Both models include strict provisions regarding the appropriate use of multinational groups’ CbC reports. Should the tax authority determine that the other competent authority has inappropriately used the information provided, it may suspend the exchange of the CbC reports. Information exchanged by means of the CbC report should be used by the tax administration for assessing high-level transfer pricing risks, base erosion and profit shifting related risks and, when appropriate, economic and statistical analysis. Additionally, the tax administration cannot base transfer pricing adjustments on the CbC reports, as the information in the CbC report on its own does not establish conclusive evidence that transfer prices are, or are not, appropriate.

Alvarez & Marsal Taxand Says:

The biggest taxpayers are not the only ones who should be concerned about IRS audits regarding cross-border transactions. The IRS has recently indicated that a larger emphasis will be placed on monitoring U.S. mid-sized companies, particularly inbound distributors. The concern is that these companies are not compensated adequately by their foreign subsidiaries for the functions and risks assumed. The IRS is confident that in many cases U.S. inbound distributors should earn a higher return than that currently ascribed. As part of the IRS’s 13 “campaigns” (Large Business and Internal Division compliance campaigns focused on issue-based examinations by the IRS), auditors will be trained to fully understand business operations of midmarket taxpayers. With the introduction of this Revenue Procedure as well as insight regarding IRS targets, U.S. multinational groups are now armed with the full set of guidance to meet their CbC reporting obligations. Whether all taxpayers are fully prepared to provide the required information may be another question.

Disclaimer

The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisers. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisers before determining if any information contained herein remains applicable to their facts and circumstances.

About Alvarez & Marsal Taxand

Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisers who are free from audit-based conflicts of interest and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the United States and serves the United Kingdom from its base in London.

Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisers in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

Back in March, Robert Stack, the U.S. Department of the Treasury’s deputy assistant secretary for international tax affairs, shocked the transfer pricing community by stating that U.S. country-by-country (CbC) reporting regulations (at that time in draft) were expected to be finalized by June 30, 2016. The Treasury has exceeded this aggressive deadline, and on June 29 (24 hours early!) final regulations were released.

On 29 June 2016, the Organisation for Economic Co-operation and Development announced additional guidance on the practical implementation of its Country-by-Country (CbC) Reporting program, published in final form on 5 October 2015 as Action 13 of the Base Erosion and Profit Shifting (BEPS) initiative. The larger BEPS program contains 15 intertwined initiatives that generally seek to limit base erosion and profit shifting by promoting transparency, coherence and substance in tax filings. CbC Reporting is a transparency initiative which recommends taxing authorities require taxpayers to provide aggregate annual business and financial information in each jurisdiction where they do business.

The growing issue of international corporate tax avoidance, also known as Base Erosion and Profit Shifting (BEPS), has received significant media and public attention. In an effort to offer clear and tangible solutions for governments and corporates around the world, the Organization of Economic Co-Operation and Development (OECD) released its final BEPS Action Plan in October 2015.